Social Security History

This is an archival or historical document and may not reflect current policies or procedures.

Arthur J. Altmeyer

A Statement on the Automatic Increase in the Tax Rate Under the Federal Old-Age and Survivors Insurance System

by
A. J. Altmeyer, Chairman, Social Security Board
Before the House Ways and Means Committee
November 27, 1944

The question which I understand the Committee wishes to discuss
today is whether Congress should act to prevent the automatic increase
in the present 1-percent-contribution rate payable by employers
and employees respectively under the Federal old-age and survivors
insurance system. As you know, if Congress does not act this rate
will increase automatically to 2 percent each on January 1, 1945,
in accordance with the schedule provided in the Social Security
Act of 1935 and retained in the 1939 amendments to that Act. If
Congress acts to retain the rate at 1 percent it will be the fourth
time Congress has delayed the automatic increase provided in the
law.

As you know from my previous appearances before this Committee,
the Social Security Board believed that it was necessary from the
standpoint of sound financing of a contributory social insurance
system that the automatic increases be permitted to go into effect.
The Social Security Board believes that the longer these necessary
increases in the contribution rate are deferred the greater is the
impairment of the financial soundness of this contributory social
insurance system and the greater the impairment of the whole idea
of contributory social insurance.

I believe that I am safe in saying that the people of this country,
that the Congress of the United States, and that the members of
this Committee favor a system of contributory social insurance for
providing protection against the inevitable economic hazards that
beset the workers of this country, rather than a Government dole.
A sound contributory social insurance system has four main characteristics.
First, it provides for benefits on a specific and predetermined
basis. Second, it provides these benefits as a matter of right without
a means or a needs test. Third, it finances these benefits largely
out of contributions made by or on behalf of the beneficiaries.
Fourth, it provides a long-range systematic method of financing
rather than a year-to-year unsystematic method.

There is no question that the benefits promised under the present
Federal old-age and survivors insurance system will cost far more
than the 2 percent of payrolls now being collected. As I pointed
out in my testimony of last year, none of the actuarial estimates
which have been made on the basis of present economic conditions
and other factors now clearly discernible result in a level annual
cost of this insurance system of less than 4 percent of payroll.
Indeed, under certain assumptions the level annual cost has been
estimated to be as much as 7 percent of payrolls. On the basis of
a 4-percent-level annual cost it may be said that the reserve fund
of this system already has a deficit of $6,600 million. On the basis
of 7-percent-level annual cost it may be said that the reserve fund
already has a deficit of about $16,500 million.

Another indication of the magnitude of the liability which the
Federal Government has assumed can be obtained from the fact that
the present value of the benefits payable to those now eligible
amounts to approximately four and one-half billion dollars. Let
me emphasize that this figure represents only the liabilities which
the Federal Government has assumed for those persons already eligible
for benefits. Since the reserve fund as of January 1, 1945, will
be only six billion dollars, this leaves only a billion and a half
dollars in the reserve fund to meet the liabilities which the Federal
Government has assumed for the payment of benefits to the 69 million
persons who have accumulated wage credits but have not yet died
or reached the retirement age of 65.

I hope that the foregoing figures will help to clear up the misunderstanding
that some people have that because we are collecting as much in
contributions at the present rate of 1 percent each on employers
and employees as it was estimated in 1939 we would collect at 2
percent each it is not necessary to permit the automatic increase
in the rate to go into effect. I wish to emphasize that for every
dollar of contributions which is collected the Federal Government
assumes a liability for the payment of benefits. It is true that
we are collecting at the present rate of 1 percent as much as we
estimated in 1939 we would collect at 2 percent. However, this is
because more people have become insured and larger wage credits,
upon which benefits are based, have been accumulated by the workers
insured under this system. Therefore, it is quite fallacious to
assume that because we are collecting as much at the present 1-percent
rate as we estimated in 1939 we would collect at the 2-percent rate
it is not necessary to permit the increased rate to go into effect.
A private insurance company that wrote twice as much business and,
therefore, had twice as much premium income as it had previously
estimated does not cut its premium rates in half, because it realizes
that it has also assumed an increased liability. In my judgment,
it is likewise unsound for the Federal Government to do so.

I do not wish to take the time of this Committee by repeating all
of the facts and arguments I have presented on previous occasions.
However, it may be helpful to the Committee if I list the following
points upon which I believe all experts are in agreement:

(1) In the early years of the operation of the old-age and survivors
insurance system, the actuarial value of the benefits paid are many
times the actuarial value of the individual worker's contributions.
(See pages 15-16 of the Report of the Committee on Finance covering
the Social Security Act amendments of 1939.)

(2) Even a contribution rate of 2 percent each by employers and
employees is probably inadequate to finance the cost of benefits
promised.

(3) It is a mathematical certainty that the longer the present
pay-roll tax rate remains in effect, the higher the future pay-roll
tax must be if the insurance system continues to be financed wholly
by payroll taxes. Therefore, the indefinite continuation of the
present contribution rate (assuming the system is self-sustaining,
and the costs are shared equally by the employees and employers)
will eventually necessitate raising the employees' contribution
rate later to a point where future beneficiaries will be obliged
to pay more for their benefits than if they obtained this insurance
from a private insurance company.

(4) Retaining the present rate creates a moral obligation on

the part of Congress to provide a Government subsidy later on to
the extent necessary to avoid levying inequitably high pay-roll
tax rates in the future. This obligation is recognized in the recent
Murray amendment incorporated in section 201 (a) of the Social Security
Act reading as follows: "There is also authorized to be appropriated
to the trust fund such additional sums as may be required to finance
the benefits and payments provided under this title."

(5) The Government obligations held by the Old-Age and Survivors
Insurance Trust Fund would otherwise be in the hands of banks, insurance
companies, and other private investors--assuming that the receipt
of pay-roll contributions so invested have not caused the Congress
to make larger appropriations than it would otherwise have done.

I think it is concerning the implications of this last point that
there has not been a complete meeting of minds. Thus, the following
statement is contained in a report of the Senate Finance Committee
concerning the tax freeze last year: "It makes no difference to
the taxpayer whether this $1,500,000,000 is appropriated to pay
the interest on $50,000,000,000 of Government bonds in a reserve
fund or whether it is a direct appropriation to the support of the
old-age and survivors system."

However, I feel that that statement fails to recognize that with
no reserve funds the taxpayers would be required to pay a $1.5 billion
subsidy to the insurance system and also be required to
pay $1.5 billion interest to private investors on securities held
by them instead of by the insurance trust fund. With a $50 billion
reserve fund, the taxpayers would pay only $1.5 billion into
the insurance trust fund in the form of interest on the securities
held by it. Therefore, without a reserve fund the taxpayers' burden
would be exactly double.

If my analysis is correct, I believe that this Committee is confronted
with a question of public policy rather than a technical question
upon which experts might differ. This question of policy may be
summarized as follows:

(1) The Social Security Board believes that there is greater assurance
that the benefits promised will be paid if the future annual excess
of benefit payments over pay-roll tax receipts is met by a Congressional
appropriation to pay the interest on the insurance trust fund rather
than in the form of an outright subsidy out of general revenues.

(2) Those who disagree believe that the larger the accumulated
trust fund, the greater is the temptation to extravagance on the
part of Congress, if not for general Government purposes, at least
for the payment of higher benefits than they would consider warranted.
The Board believes that this argument is unsound for two reasons:
First, because while this fund represents an asset of the
insurance system it represents a liability of the Government
just as truly as any other outstanding Government obligations. Second,
because the Board believes that the present contribution rate, so
far below the value of the protection provided, creates a temptation
to increase the benefits without giving proper consideration to
the true costs involved. Parenthetically, I should also like to
point out that the continuation of the present 1-percent rate not
only tends to depreciate the true costs involved, but also depreciates
in the minds of employees, employers and the public generally the
great value of the protection afforded.

In my testimony before this Committee last January, I made the
following statement: "In the history of social insurance throughout
the world the major difficulty of social insurance systems has been
the lack of adequate financing of old-age retirement benefits. It
is always easiest to delay levying the necessary insurance contributions,
thus perpetuating and strengthening the belief that the insurance
benefits are meager and the costs of the insurance system are low.
Inevitably, when the time comes to increase the taxes, many reasons
can always be advanced as to why the imposition of the additional
taxes is unwise or impossible. In this country we are still in a
position to avoid these mistakes by getting clearly established
now that if our people want social insurance they must be willing
to pay for it. The time to obtain the necessary contributions is
when people are able to pay for the insurance and are willing to
pay for it because they can be shown that they are getting their
money's worth. If we should let a situation develop whereby it eventually
becomes necessary to charge future beneficiaries rates in excess
of the actuarial cost of the protection afforded them, we would
be guilty of gross inequity and gross financial mismanagement, bound
to imperil our social insurance system."

In closing I should like to emphasize that all of the reasons that
the Board has advanced for permitting the schedule of rates in the
law to become effective deal with the proper financing of a contributory
social insurance system. The Board has not undertaken to make any
argument from the standpoint of general Government financing or
from the standpoint of combating inflationary threats. However,
the Board wishes to point out that most of those who opposed the
automatic increase in the contribution rate in January 1940 did
so largely for reasons not connected with the financing of a contributory
social insurance system and emphasized the deflationary effect of
the increase. Those arguments advanced in 1940 not only are inapplicable
under present conditions but logically would support an increase
in the contribution rate now. At all events, it appears probable
that the workers of this country and business generally can absorb
the 1-percent increase as readily or more readily at this time than
they could a year hence or at any other time in the near future.